Tuesday, September 30, 2008

A friend who is just starting graduate studies got a note yesterday from Discover Card. Discover is raising her interest rate to prime plus 15 percent for all prior purchases, and prime plus 10 percent for all purchases going forward.

It was a curious notice to read, as the account holder in question pays her card off in full every month, and has no prior purchase balance.

But I have heard so many stories like this — people paid for tuition using their credit cards, then the bank raised their credit card interest rates in a big way — that I have to believe that there is now an unwritten rule among banks against paying for tuition with a credit card. It seems that banks automatically and immediately raise interest rates for any account holder who pays any college tuition, regardless of anything else in the account holder’s history.

The theory, apparently, is that you will be in college for the next four months and won’t be earning much money to pay off your tuition during that time, so the banks may as well soak you for as much interest as they can get during that period.

This may make a few extra bucks for the banks in the short run, but it is a terrible idea. The account holders often feel insulted, cheated, and suspicious, and rightly so, and that can only damage the banks’ chances of future revenue.

My friend in graduate school won’t be paying any interest on her credit card, since she pays the full balance every month, but she is responding to the interest rate hike by cutting back anyway. “I have to stop using my card,” she told me. “When I use my card, I use it too much. I need to save my money — I might really need it someday.” And that’s an approach most of us may have to take.

Even if there is nothing at all wrong with your credit card history, you might suddenly find one day that banks are raising your card interest rates, perhaps even doubling them, or cutting your credit limit, even cutting it below your current balance so that your new purchases are declined, and the bank may do this with no warning and for no reason that you can figure out. Banks are doing this far more often as they try to guess which borrowers are solvent and which are not. There is really no way to guard against this except by not relying on your credit cards.

In a panel discussion last winter, a banker was asked how close to your credit limit you can go before it raises a red flag back at the bank. He may have surprised everyone in the audience when he said that if you want to be safe, you should not spend more than 30 percent of your credit limit. For example, if your credit limit is $13,000, and you don’t want your bank to worry about how much you are spending, keep your balance below $3,899. Years ago, you could spend right up to your credit limit, and often 15 percent more, before the banks would rein you in. Now the credit limit is mostly an illusion. Try spending half your credit limit, and you shouldn’t be surprised if your bank cuts your credit limit by half.

In case it isn’t obvious, this is a part of the “credit freeze” that Federal Reserve chairman Bernanke and Treasury Secretary Paulson have been talking about. It also illustrates why the Wall Street bailout bill that failed yesterday in the House would not have succeeded in addressing the problem. We know it would not have prevented bank failures, but it also would not have made the banks start lending loosely again. If a bank is worried about a consumer borrowing $3,900, it is not because the bank does not have the money to lend. Rather, it is because the bank is worried that the consumer may not pay the money back. That is a worry that will not go away no matter how much money the bank has in its safe.

The current financial crisis has been blamed on a real estate bubble and a derivatives bubble, but the real culprit is the lending bubble. The Wall Street bailout idea can never work because it just feeds a collapsing bubble. A bubble, when it collapses, will continue to collapse no matter how much money you pour into it.

It is a bizarre concept for most of us to imagine an economy that is not primarily built on borrowed money, yet borrowing was not the key to any economy in any century before the 20th century, and we can keep our current economy going even as the lending bubble goes away.

For most of us, this starts with our credit cards. We’ve been hearing for years that paying off credit cards is the surest way to improve financial strength. Now it may be the key to your financial stability too. Now is not the time to lean on any of your credit cards. If you have credit card balances, pay them off quickly, with a sense of urgency about it. Skip dessert or don’t buy any more clothes for a couple of years if that helps you pay off your cards faster.

In the past, many of us have relied on credit cards to get us through tight times financially. That may not be possible in the next few years. If banks learn you are suddenly in a difficult financial position, that is exactly when they would like to cancel your credit cards — something banks are doing far more often these days. In a pinch, you might borrow a little from friends, but for the most part, you are going to have to save money to cover the next little downturn in your personal economy. As bizarre as this sounds, it is the way people did it up until about 1975. Yes, that is a very long time ago, but it still proves it can be done. How much should you save? A good rule of thumb is to save enough to cover most of a year of living expenses.

After you do that, it is important to pay off all your loans — even your home mortgage. Traditionally, we have thought of a home mortgage as a binding contract, which the bank can’t squeeze you out of unless you are ever late with a payment, but banks may be able to find a way out of this too, so a mortgage is not an arrangement you want to entirely rely on either. You may have no choice — you have to live somewhere — but do what you can to get your mortgage balance below what you can earn in one year, and then pay it off completely.

Businesses need to do the same kind of thing. Wall Street lobbyists yesterday morning were going around with a soundbite, probably fictional, of an employer who worried that if the credit freeze continued, he wouldn’t be able to borrow money to meet the payroll. That is a real concern, but the solution is not to encourage banks to lend money to businesses that are living so close to the edge. Those are the loans that go bad. Businesses need to stop depending on loans for their day-to-day operations. I know this must sound bizarre in an age when financiers debate whether a debt-to-equity ratio of 5 or 10 is better. Yet 40 years ago, a banker would laugh you out of the office if you were running a business and asked for a payday loan. If you operated your business that way, bankers wouldn’t even consider it a business. That was a long time ago, but it proves that a business can be operated without relying on multiple lines of credit.

Again, the reason not to lean on credit is for your own financial stability. When the whole credit market is unstable, you cannot add much stability to your own life by employing credit. And as you free yourself from all the entanglements of credit, you also help get the economy going again.

I am not really suggesting that people should never borrow or lend money, just that we may need to bring our use of credit back into balance. In my opinion, that means we should be in debt no more than about half of the time. The way things work now, many of us are in debt from the day we sign up for college until the day we die. That is not a good balance, and the lack of balance is what has caused the credit bubble and the current recession. The faster we can individually stop leaning on credit as a way of life, the sooner the recession can end.

Monday, September 29, 2008

I took a look at the new legislative text of the proposed Wall Street bailout overnight, and while the plan is no longer structured as a slush fund, it still offers Treasury Secretary Henry Paulson tremendous flexibility — enough to:

Spend all $700 billion before November 2

Pay large banks as much money as he wants to

You might hear from someone in Washington that this second point has been addressed. The bill has a provision requiring the Secretary to pay fair prices for some assets it purchases. This is the first sentence of subsection 101(c), which is titled “Preventing Unjust Enrichment.” Sounds good. Yet the second sentence of this subsection offers a loophole big enough to drive a nuclear bomb through. “Unjust enrichment” is permitted for “troubled assets acquired in a merger or acquisition.” Virtually all of the assets of a bank like JPMorgan Chase went through their big merger, so I am calling this provision the JPMorgan Chase clause. Do you think it will bother anyone that the Wall Street bailout bill gives JPMorgan Chase an advantage over your reliable hometown bank that hasn’t been through a merger?

The House of Representatives is planning to vote today on this deeply flawed and dangerous legislation, a bill that, even if implemented correctly by the Treasury Secretary, would do far more harm than good. Now would be an excellent time to email or telephone your Representative to say, “The Wall Street bailout bill is deeply flawed and dangerous. Please save the U.S. dollar by voting no on the bailout bill.”

Sunday, September 28, 2008

When people think of the good life, they tend to think of it as something distant, complicated, and difficult to attain. Yet there really isn’t that much to it. If you want to put together the feeling of the good life, these are the key things you will need:

Clean water

Clean clothes

Fresh food

Shelter, or balmy weather

Peace and quiet

Friendly people

Lighthearted music

Put these seven elements together, and you could make a convincing one-minute movie for your own resort. Yet none of these seven keys to the good life has to be expensive. When things are going even moderately well for you, all seven are within your reach.

Resort destinations and cruise lines try to make you feel like a millionaire — and spend like one for a week or two. But if you’re looking for the good life, what matters most is that you take the time to pay attention to a few of the more basic things in life.

Saturday, September 27, 2008

For today I was going to write a fictional dialog between a voter and a canvasser — a compaign volunteer going around knocking on doors on behalf of a candidate. The canvasser would emphasize the need to take $10,000 of the voter’s family’s money and pass it along to people in need on Wall Street. Oh, and by the way, could the voter please make a contribution to the candidate’s campaign?

But Charles Fulwood of the Nader campaign last night posted a far more creative treatment of this issue:

My Dear, Dear Citizen,

How are you doing? I hope this letter finds you and your family in good health and living prosperously. God knows, our families are the most precious assets in our lives.

I write to you with great reluctance, but this matter is of such importance that I must put aside my normal reservations and pride.

With great humility, I need to ask you to support an urgent, secret business opportunity with a transfer of funds of extraordinary magnitude.

Friday, September 26, 2008

I don’t usually speak in such strong language, but I’m just so surprised at how quickly bank failures went from being the elephant in the room that no one wanted to mention to being the obsession of a nation.

Three weeks ago when the Republican National Convention was wrapping up and I was writing about Silver State Bank of Henderson, Nevada, a story that for a brief period I thought that AP was not going to cover, it seemed that no one was paying attention to the banks. The monotonous parade of bank failures had almost fallen out of the news radar.

Nineteen days later, in a prime time television address, the President of the United States raised the specter of bank failures as he basically begged the public for money — $700 billion of it, which he was hoping would avert an economic crisis.

But the President’s plan was so disastrous in conception and so unpopular with the public that it never found any traction. By Thursday, a chorus of outraged citizens slammed Congress’s web servers, keeping the House of Representatives effectively offline for most of the afternoon. I have never seen anything like it.

House Speaker Nancy Pelosi and other Congressional leaders thought they could put together a compromise plan that could pass Congress, then had to take that back Thursday afternoon, as around 100,000 voters took to the streets demonstrating to stop the bailout. Members of Congress we have heard from are talking about an overwhelming or even “unanimous” opposition to the plan among constituents, along with a level of anger and resentment they don’t normally see in budgetary matters. With Election Day barely a month away, where will you find over a hundred Representatives who are willing to jeopardize their own re-election by voting yes on a high-risk Wall Street bailout plan that many experts say would not accomplish anything constructive? It is a situation Pelosi has not faced before as Speaker.

One of the problems with the Wall Street bailout plan is that no one in Washington seems to realize how little $700 billion is in comparison to the size of the problem. Other guesses, from people who know more about banking, suggest the cost for the Paulson plan is 7 to 14 times that amount. It turns out that the $700 billion price tag was basically pulled out of a hat:

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

As we found out Friday afternoon, it really isn’t about the economy. An economic stimulus package died in the Senate, after Bush threatened to veto the bill, saying $56 billion was too much to spend to rescue the economy.

And so Bush’s implied promise that the $700 billion Wall Street bailout would get the economy moving again and stop the bank failures is probably no more than posturing. There is really nothing in the plan to do either. When a bank keeps losing money, there is nothing that will keep it in business, a point that was underscored last night by the largest bank failure ever.

The FDIC took over Washington Mutual (Wamu) and turned it over to JPMorgan Chase, who paid almost $2 billion for it. Wamu had been in obvious decline for months, with no hint of a turnaround on the horizon, and it was a relief and something of a surprise to see another bank willing to buy it. But the FDIC had to take over Wamu first so that Chase could get just the bank, without the holding company.

This is the largest bank failure in history. Until this week, the FDIC record was a $40 billion bank closed in 1984. Wamu was 8 times as large, with over $300 billion in assets. The size is roughly equal to the total of all bank failures received by the FDIC over the last 18 years.

Unlike other recent FDIC takeovers, JPMorgan Chase did not merely acquire the deposits of Wamu, but the entire bank. This simplified things for account holders. Overnight, a note was added to the Wamu web site explaining that nothing would be changing for customers until next year.

Chase now has 5,400 branches. It will decide later which are extra and can be closed. It will eventually put the Chase name on all the branches.

JPMorgan Chase has taken its own blows from the economy lately, so is it healthy enough financially to take on the potential troubles of Wamu’s accounts? From everything I can see, it is. Its profits are down because of the state of the economy, but not disturbingly so. And there will be cost savings in the combination of the two banks. JPMorgan Chase says those savings will eventually cover its merger costs.

Way back on Tuesday, which seems ages ago now, I got a note in the mail from Wamu. The headline read, “0% FIXED APR until January 1, 2010.” A paper mockup of a credit card was glued to the letter. Knowing Wamu’s predicament, I was torn. What would happen if you applied for a credit card from a bank that went under before they received your application in the mail? But my conscience said that a morbid curiosity was not a good reason to do business with a company. The application is still on my desk.

Years ago, I did a significant amount of work for Wamu — my usual work, helping them understand their customer base better. It helped them guess more accurately which customers might be looking for which services, so they could sell more services faster. In the end, this may have helped them fail a little faster, and that is a sobering thought. Wamu’s decision to offer me a credit card certainly came out of the same kind of work that I did on their customer base (and could even have been derived from my actual work — I have no way of finding out), as they analyzed the data from my 2006 mortgage inquiry and guessed I might want to be a credit card customer. But the teaser offer they selected for me was emblematic of the failure of Wamu’s business model. Wamu was committed to signing up customers, but not so committed to making sure it made a profit from each customer.

This takeover on a Thursday night breaks the FDIC’s Friday night pattern, but I wouldn’t read too much into that. It seems to me that if the FDIC worked out a deal with JPMorgan Chase they would want to go through with it that same day if possible, before JPMorgan Chase had a chance to change its mind. If there had been no buyer, the FDIC would have suffered billions of dollars in losses on the takeover.

The FDIC will shortly be considering an increase in the insurance premium it collects on all bank deposits. That increase, it is hoped, will cover the FDIC’s extraordinary costs during this run of bank failures.

Thursday, September 25, 2008

When people say, “We have to do something,” it is usually right before they do something remarkably damaging.

We see this all the time in team sports. One of the most notorious examples in football was the 1999 Buffalo Bills. They had been one of the dominating teams in the league for 12 seasons, but had not won a Super Bowl. So on January 8, 2000, they replaced their quarterback for the first playoff game of the post-season. The quarterback, Doug Flutie, had been performing brilliantly, but the team felt as if they had to try something different.

It was a colossal blunder from which they have not yet recovered. The team lost that game and have squeaked out only one winning season in the eight years since.

We are now seeing the same effect in Washington, as Congress tries to figure out what to do about the banking system, which threatens to collapse any day now. The proposal to give Henry Paulson a $700 billion slush fund to try to make the banking industry feel a little better is off the table now, shouted down by a chorus of angry voters, but we still have 535 worried legislators stumbling around the halls of Congress muttering, “We have to do something.”

Congress might want to take a look at the recent polls, in which more than 60 percent of voters thought that any further government intervention in the economy would be likely to make matters worse.

It is like hitting your alarm clock with a hammer. The physical principle of entropy says there is only the slightest chance that this will fix your clock if it is broken. More likely, the hammer blow will damage it further. If you don’t know what you’re doing, but you’re determined to have an impact, that is the kind of impact you can expect to have.

Sometimes there is nothing you can do. When no one has a good plan, instead of choosing the least bad plan and getting started on it, it is often better to hold out, to wait for a good plan to emerge.

“We have to do something” is a phrase that makes physicians cringe. Sometimes it means they are being asked to do an ill-conceived surgery that is likely to only add to the misery and hasten the death of an already dying patient.

The U.S. economy is not dying — far from it — but people are talking about it as if it were. There is not even a significant chance of a depression unless Congress, in its haste, does something enormously bad.

Yet there is still a chance that that is exactly what they will do. I hope there is a way to calm them down so they don’t add to the damage that has already been done.

If you talk to Congress today, this is what you might say:

This is not the time to blow up the U.S. economy. Vote no on the Wall Street bailout. Save the U.S. dollar.

Wednesday, September 24, 2008

In a recent Gallup poll, one fourth of American adults thought the United States was in a depression. If asked today, I’m sure a few more people would agree.

At the same time, newspapers are running editorials arguing that the current situation is not a depression because it is not the same as the Great Depression.

I have to have sympathy with both points of view on this question. One can never just dismiss the discouragement and pessimism of a quarter of the people out there. And it is perfectly understandable that news people might want to cheer people up by explaining how much worse things could be.

But let’s be reasonable. This might be a time of broad economic difficulties with no end in sight, but that is not what depression means. This is also not the Great Depression, but that does not mean it is not a depression. (Hint to the editorialists: there is a reason they called it “great.”) Depression is a word with a specific meaning. A depression is an extended period of sharply reduced economic activity with high unemployment and widespread business failures. This is only a recession — economic activity is declining slightly, and is not bouncing right back. It is not a depression.

But it scarcely matters that the current situation does not fit the scientific definition of a depression when it would take just one massive public policy blunder, such as the “rescue” package currently before Congress, to put us in a depression. It is still useful to look at the current situation through the lens of a depression because the same kind of ideas that get you out of a depression can also help you avoid one.

A depression occurs when lots of people get going too fast in the wrong direction, and they have to stop and figure out which way to go before they can get going in the right direction again. The faster you can stop, change direction, and get going again, the better your prospects are.

Going too fast in the wrong direction means doing things that cause financial losses as you’re hurrying to keep up with the competition. When this happens broadly enough, we have a recession or a depression. The first thing you need to do when you find yourself in this situation is to stop hurrying. When you’re going in the wrong direction, hurrying just makes things go bad faster. Catch your breath, then stop doing the things that cause the financial losses.

The huge losses in the U.S. economy this year have to do with abstract securities — pieces of paper that have no simple, obvious connection to any tangible or workable property. There are smaller losses from real estate. People were caught off guard when the value of the abstract securities and real estate suddenly changed. At the same time, there are problems with SUVs and other kinds of equipment that use energy inefficiently.

If you’ve gotten yourself into a problem personally by borrowing money to buy real estate or abstract securities, I’m sure it’s painfully obvious that you need to stop doing that, and to pay back the loans somehow. It is also true that people across the economy have to do this for a broad recovery to be possible. If you have an SUV, I am sure you have already told yourself to check the fuel efficiency rating of the next car you buy. The big auto makers need to shut down the SUV factories in the meantime. In a similar vein, it would help things if the home builders could take a two-year vacation.

When depressions hit, why do they last so long? In a word, the reason is stubbornness. People keep trying to do what worked in the past, or they try to go back to past ways of doing things. When you experience a loss, it is natural to want to cling to the past, to try to bring it back, but when enough people do so at the same time, that is what causes a depression or keeps it going.

The solution to a depression is resilience, or the willingness to leave failures behind you and take a new approach. When the economy has enough resilience, depressions are impossible. It is only when the economy broadly accumulates high levels of brittleness and stubbornness that depressions can develop.

Of course, when you say stubborn, the current White House comes to mind. Do you remember the line, “Failure is not an option”? That is exactly the kind of brittle thinking that causes depressions. When you don’t want to admit that things are breaking down, you don’t adjust, and things just keep getting worse. The administration honestly believes that the decline in real estate values and the various problems with abstract securities are all some kind of bad dream that we will wake up from before the election. And as long as they keep thinking that way, they are not looking for the solutions we need.

Some of the biggest sources of abstract securities have been the major brokerage houses on Wall Street, Fannie Mae, Freddie Mac, and AIG (American International Group). We would be better off, and could easily avoid a depression, if we could shut these companies down. Even better, of course, would be if we could get them to change their approach so that they stop creating the risks that caused the current problems. But when companies are committed to doing things in a way that causes trouble, it is better to let them go under when the losses pile up high enough to do them in. The administration had the chance to let Fannie Mae, Freddie Mac, and probably AIG go out of business, and they muffed it. They were clinging to the past, not willing to admit that things had gotten off track. And now, they are pushing for fast action on the most disastrous “relief” package ever conceived, a plan that could destroy the U.S. dollar and bring down most of the banks. This is what happens when you keep rushing while going in the wrong direction. When everything is going right, speed is what keeps you a step ahead of the competition. But when everything is going wrong, speed just makes things go wrong faster. You need to stop and figure out the right direction. Direction, not speed, is the answer to a depression, or to any other economic crisis brought on by a systematic pattern of failures or losses.

This week’s drama in Washington would work as a classic tragedy, or at least a trashy novel. A compulsive gambler from Wall Street finds himself in charge of a house (the U.S. Treasury) that is already mortgaged to the hilt, but he keeps on gambling with whatever money he can get his hands on. When he gets together with an angry old rancher who is in denial about his cocaine addiction, things only get worse. The addict encourages the gambler, telling him he’ll win the next one. In the end, the two can’t stop themselves from selling their souls to get one last roll of the dice before everything finally falls apart.

A compulsive gambler or an addict usually won’t stop until there is no money left. Of course, Bush and Paulson are not an addict and a compulsive gambler, but they are making policy decisions as if they were, and the money will run out pretty soon. Paulson almost came out and said in yesterday’s hearings that he intends to spend the entire $700 billion in a matter of days, then return to Congress to ask for more. The Treasury could be empty before the election.

But even if policymakers in Washington make terrible choices, the rest of us can still approach the economic challenges we face in a healthy way. The keys to avoiding a depression or minimizing its impact on you are:

Stop.

Find the right direction.

Get going in the right direction.

I do not believe we will have a depression, mainly because I see little chance that the “rescue” package will get through Congress, but if we do have one, it will not be something to sit around worrying about. It will be a time when action matters more than ever. I think most people think of a depression as a kind of train wreck, and they want to stand around looking at the damage and shaking their heads. If you instead think of a depression as a transition that just needs to get back on track, it is easier to see the action that is needed.

Tuesday, September 23, 2008

If you have to choose between keeping your current bank and heating your home this winter, which would you choose?

This question is not an intellectual exercise, but an actual choice facing Congress this week. The U.S. dollar plunged by the largest amount in years yesterday and the price of oil shot up by a record amount just on the possibility that the Wall Street bailout bill might pass.

If it does pass, the value of the U.S. dollar will fall within a few weeks to about 48 euro cents, and the price of oil by December will surpass the records set in June. Then, millions of people will not be able to heat their homes.

I thought something might be fishy when the White House said they had made a legislative proposal Thursday night, but no one seemed to know what was being proposed until Monday morning. And since people started to find out what the Wall Street bailout proposal implied, the flood of mail in my inbox has been more unanimous than on any issue I have ever written about. If what I am hearing is any indication, this most massive giveaway program in history could be the subject of a popular revolt.

“We could have people freezing to death this winter because they can’t afford heat, while the government is on the verge of bankruptcy and can’t help them out.”

“I was torn about it for a while, but then I thought: Am I going to take the largest amount of money ever assembled in history . . . and give it to George Bush to hand out to failed bankers?”

“If the program helps out people who borrowed more than they could afford, but it doesn’t do anything to help me get a house, when I’ve been responsible about it and they haven’t, that isn’t fair.”

“I feel strongly that people who make bad investments should have to bear the consequences, take their losses, and not have the government step in to bail them out.”

“I’ll never be able to go to Europe again. The dollar won’t be worth sh—.”

“It’s just one last money grab by the Bush people. They see every problem as a profit opportunity for themselves.”

“Suppose the entire banking system fails. They’ll just be getting what they deserve. If we have to set up an emergency banking system, it won’t cost anywhere near $700 b[illion].”

“It has the look of a bank robbery, only it’s the bankers who are doing the robbing and the bank they’re robbing is the U.S. Treasury.”

“There isn’t anything [in the bailout plan] to save a bank like WaMu or Wachovia. It might not save even one bank. And it doesn’t do anything to get the economy going again.”

I received these comments, and dozens more like them, from people who are all over the political map. All are high school graduates, I believe, but they have little else in common.

It didn’t help people feel better about the bailout when we learned this afternoon that bankers at the bankrupt brokerage Lehman Brothers will shortly be getting $2.5 billion in bonuses. The economy has shed a million jobs this year because of mistakes made in part by the people at Lehman Brothers, and they drove their own company into the ground, and they’re getting bonuses? Billions in bonuses? It is not the kind of news that plays well in the part of the country that Wall Street people like to call Main Street.

Treasury Secretary Henry Paulson has also been undermining the legislation’s chances by being startling vague about some of its provisions and implications. It does not help that some of the provisions in the bill he apparently drafted appear to be unconstitutional. But these details of implementing the plan are not so important to the people I am talking to. They object, quite simply, to the amount of money, and to where it is intended to go.

And from what I understand about the proposal now, I can say flatly that it would be the worst thing ever to happen to the U.S. economy. It will not rescue the banks. It will not even help them collapse more gracefully. Many of the storied banks of the United States will still go down, one after another. And the bill will do nothing to get the economy going. Paulson optimistically predicts that it will help banks start lending again, but I do not believe anyone, least of all the bankers, wants to see banks go back to lending the way they were two years ago. The business model of American banking is broken, no one really has a solution to that right now, and adding more money to the equation does not change that.

And these failings pale in comparison to what the “rescue” plan would do to the U.S. currency. If the bailout passes, the U.S. dollar will decline rapidly — reaching the neighborhood of 48 euro cents in a few weeks, then probably continuing to decline for years to come. With the falling dollar, oil prices will go up, and not just a little! Oil will pass $150 by December and hit new records all the way through June. The reason this will happen is because of the enormous deficit spending required for the Wall Street bailout. No government in history has ever borrowed and spent so much money in such a short time, but when you look at the closest parallels in the history books, when countries have done anything similar, their currencies have collapsed.

As a rule, deficit spending causes currency declines, and the largest deficit spending binge in history, even in the richest country in history, can only add to the declines the U.S. dollar has already seen in the last five years.

And so, in the end, it really isn’t a choice between keeping the banks we have and heating our homes this winter. With the Wall Street bailout plan, we get the worst of both worlds. The banks fail anyway, and the price of home heating oil (along with all other forms of oil, including gasoline) skyrockets. I know for a fact that members of Congress are hearing from constituents on this, so the bill will probably be dead by tomorrow, but if you’re concerned about the future of the United States, it doesn’t hurt to add your voice to the discussion. The best way to do this is to telephone or email your state’s two senators and your representative in Washington directly. You can simply ask them to vote no on the Wall Street bailout.

Another option is the web site below (for those who don’t mind that its petition is sponsored by ImpeachBush.org). Along with your other comments, you might mention that it doesn’t make any sense to sacrifice the U.S. dollar when there is no real plan to save the banking industry. If you like, you might add that this bill would be the worst disaster ever to hit the U.S. economy. Because that’s what it would be.

Monday, September 22, 2008

When a pipeline company paid for a “renovation” that turned Sen. Ted Stevens’ Alaska cottage into a mansion, was it, in effect, a bribe? Or was this, as the senator has insisted, a perfectly normal business transaction in which nothing improper occurred? That question is at the heart of Sen. Stevens’ corruption trial, which begins today in Washington.

Laws require politicians to report transactions such as these so that the public can find out about possibly improper payments to politicians. Prosecutors say Sen. Stevens failed to report the renovations, along with a series of other similar transactions. Sen. Stevens says his financial disclosures were complete and accurate. A jury will decide.

What is at stake here is the ability of the government to make policy decisions without being unduly influenced by big-money commercial interests. If businesses can freely give millions of dollars in gifts to government decision-makers, it is hard for them to make decisions in the public interest. If much of their income depends on making decisions that benefit specific companies or industries, that is an economic incentive that is, in the long run, impossible to ignore.

But these gifts cannot be prevented if the companies providing them and the government officials receiving them are permitted to disguise them as unrelated business transactions. If I am a public official, and your company pays me half a million dollars for two acres of swamp land I happen to own, that could just be a bribe in disguise. That is why I would have to disclose that transaction. If it turns out that Sen. Stevens did not disclose a series of such thinly disguised gifts, then he has betrayed the public trust and ought to go to jail.

Sunday, September 21, 2008

How much is $14 trillion? It’s a question most of us have never had to ask before, but now we have to. Combining the costs of the bailouts of Fannie Mae and Freddie Mac (estimated at $1–3 trillion), the commercial bank portfolios (estimated at $5–10 trillion based on early descriptions of the program), and miscellaneous financial enterprises (Bear Stearns, AIG, and who knows what else, maybe it could come to $1 trillion before this is all over), and taking the high end estimates, we’re looking at a potential bailout cost of $14 trillion. So how much money is that?

This simplest way to put $14 trillion in perspective is to say that it is approximately how much the entire country of the United States produces in one year. It is a year’s income for the country.

Looking at it another way, it is approximately the total of all U.S. federal spending for the last six years.

By one measure, it is about 10 times all the money that is out there — all the money that can be spent directly. So to spend $14 trillion, we would have to spend all the money that exists in the country 10 times over.

Of course, the $14 trillion estimate is much higher than the $1 trillion estimate that the Wall Street Journal is discussing. But the estimate of $1 trillion is impossibly optimistic. It is based on the assumption that by next summer, U.S. real estate values recover by about 15 percent, approaching their peak levels of about three years ago, and that the current recession ends by the end of this year. A more likely scenario is that real estate values continue to fall and are 5 to 10 percent lower next summer than they were this summer, and that businesses, banks, and consumers remain cautious for years to come. Besides, even with the Treasury Department’s super-optimistic scenario for the economy, I don’t quite see how $1 trillion is a realistic price tag. It seems to me that policy makers are lowballing the price to get the programs through Congress. Kind of like they did with the Iraq invasion and occupation, which initially was supposed to cost around $80 billion, but the costs kept piling up, and may by now have exceeded $1 trillion. If they are doing the same kind of lowballing this time, we will be lucky to get away with a final price of only $14 trillion.

Yet I think it is obvious that the U.S. taxpayers cannot pay $14 trillion and the government cannot borrow that much either. Having the taxpayers pay $14 trillion would require all of us to pay all our personal income in taxes for the next two years or so. That would make no sense at all. Borrowing an additional $14 trillion would reduce the U.S. Treasury to junk bond status, and would add more than $1 trillion a year — your share of this would be more than $10 per day — to the interest payments the government is obliged to pay. Again, that idea is a non-starter.

The Treasury could print $14 trillion in money, but that would lead to ridiculous and painful levels of inflation. If you think people complained about paying $5 a gallon for gasoline, imagine what they would say about $300 a gallon. And the inflation would ruin most of the banks that this plan is supposed to save. Again, that doesn’t make any sense.

The U.S. government just can’t spend $14 trillion right now. It is an open question whether it can spend $1.4 trillion, a tenth of the total estimated costs of the bailouts that are on the table right now. And so it is clear that any bailout of the financial system will be a half-hearted, partial effort at best. Spending the whole $14 trillion still would not get us out of the current recession, and spending a tenth of that or less does not guarantee any results at all.

There are other problems with a partial bailout. Who decides which banks get the benefit of the bailout, and which get shut out? Will the program be used to pour money into specific regions for political reasons, or funneled as a political favor to specific companies who just walk away with it, as happened with so much of the Iraq war money?

After the Fed bailed out AIG, the Treasury had to step in to bail out the Fed. As the next step in this high-stakes game of double-or-nothing, the taxpayers will have to bail out the Treasury. But once you tap out the taxpayers, the game is over. And although it seems as if that could never happen, we are already perilously close to that outcome.

Saturday, September 20, 2008

Sarah Palin was in legal trouble before she became a vice presidential candidate. But she may be in more political trouble than legal trouble.

Someone needs to come right out and ask her if she thinks the laws that prohibit sexual violence are a proper activity of government. In other words, should rapists be arrested and prosecuted, or should rapists walk free because the government has more important things to do?

It’s not a question you would normally ask any American politician, but Palin’s own statements suggest that she fired her Public Safety Commissioner in a power struggle in which she was trying to block enforcement of sexual violence laws.

Specifically, she approved a trip to Washington by the Public Safety Commissioner, then disapproved of it after the fact and, she says, fired the commissioner for taking the trip. This, she has said, was because she learned that the purpose of the trip involved prosecution of sexual assault cases. It was only then that she decided the trip was a waste of government resources.

It is one thing to be skeptical of the ability of the government’s ability to prosecute sexual assault cases. It is quite another to be so angry at an official for attempting to see that sexual assault laws are enforced that you fire him for it. What can the public conclude other than that Palin wants to protect rapists from prosecution?

This conclusion gains more credence when you learn that as mayor, Palin had her town charge rape victims a fee, a very unusual arrangement that apparently is not done anywhere else in the state.

Palin has questions to answer. No public official in the United States can be in favor of sexual violence. It is not a socially acceptable position to stake out in American politics, yet that is what Palin appears to be doing. If she cannot clear the air in short order, then she must resign.

Friday, September 19, 2008

If I thought everyone was talking about the banks last week, this week picked it up by an order of magnitude. First, two investment banks, Lehman Brothers and Merrill Lynch, changed their financial arrangements, the former in bankruptcy, the latter agreeing to a stock swap with Bank of America. Then the focus shifted to AIG (American International Group), which recently was considered the world’s largest insurance company.

The involvement of AIG in banking is hard to explain in a few words, but I’ll attempt it. Many of the assets held by banks are very abstract and it is hard to say what they are really worth. By selling banks another asset that is even more abstract, basically a kind of guarantee or insurance, AIG allows the banks to record these assets at a specific value. If you heard exactly what these assets are, your initial reaction would probably be along the lines of, “Does that make any sense? Is it even legal?” Yet without them, a quarter of the banks in the United States and Europe would be worth a lot less than they are, and would, at least technically, be insolvent — without enough assets to cover their obligations, they might be forced to shut down. This is why the Federal Reserve Bank was so eager to advance AIG an $85 billion loan to keep it going for a few more weeks.

This partial bailout of AIG is scary in more ways than one. First, the amount of money is not enough, by itself, to keep AIG in business. If they can’t make some further arrangements, we may have just postponed their collapse until November. And what then? Second, if this many of our banks depend for their very existence on assets so abstract they cannot be adequately explained to the average college graduate, is it good to encourage those banks to continue operating, or does that just compound the current problems? Third, is Washington’s entire strategy just to postpone the coming collapse until after the election? Fourth, if the U.S. government wants to own an insurance company, couldn’t it set up one of its own design for less than $85 billion? And finally, where will the Fed get all this money? The stock market rallied on news the Fed was bailing out AIG, then slumped when the news got out that the Fed was running out of money and would have to be bailed out by the U.S. Treasury. As one observer put it, “The Fed is running out of money? Now we’re really in trouble!”

In the middle of all this, at least two analysts called for urgent funding for the FDIC (Federal Deposit Insurance Corporation), saying if Congress doesn’t start sending money over within the next three weeks, it will be time for people to start taking their money out of the banks. Why? FDIC insurance is still valid after the FDIC runs out of money, but at this point, if you have a deposit in a failed bank, you may not get your money out until Congress appropriates the money for that purpose, and the way Congress works, that could take a year or two. So if you think you might need your funds within the next two years, is it really safe to keep it in a bank? For the measly 0.85 percent interest they pay these days? Banking customers will be far more comfortable about having money in the bank if Congress fully funds the FDIC for what’s coming, but I don’t think Congress has gotten the message yet.

Then another investment bank, Morgan Stanley, saw its stock fall off sharply as it scrambled to find a buyer. The popular rumor was that it would be Wachovia, even though that would be a stretch for that bank’s already stressed balance sheet.

Washington Mutual (Wamu) had its people on Wall Street float a rumor that it was selling itself in an auction, with Wells Fargo and Citigroup the two bidders — or was it JPMorgan Chase? This rumor stabilized Wamu’s stock price, which in a year had fallen by 95 percent, but none of the supposed buyers seemed credible. Other stocks in financial trouble tumbled on the thought that there was no one left in the world with $100 billion to sink into a foundering U.S. corporation, no matter how big its brand name might be.

Then Thursday night the White House announced that it would be proposing to let the Fed act as a sort of collection agency that would take over banks’ bad debts. The stock market soared 3 percent in less than an hour on the hope that the Fed was prepared to bail out the entire banking industry, erasing all their crazy mistakes of the past five years. The new Fed operation would be similar to the Resolution Trust Corporation (RTC). But wait — RTC took over the assets of failed banks, carrying on litigation, foreclosing on bad loans, and selling off the real estate. Maybe the return of that model is not such good news for bank stockholders after all. The White House says it has sent this proposal to Congress, but members of Congress say they have not yet seen it. If the proposal is everything that Wall Street hopes, it will cost the taxpayers $5 to 10 trillion, and that is on top of the $1 to 3 trillion that the Fannie Mae/Freddie Mac bailout will cost. This would be by far the biggest government bailout ever, far bigger than all of FDR’s Great Depression programs combined. Chances are, the bailout will be the largest ever, but it will have to be something less than what Wall Street seems to be expecting.

New emergency rules prohibit short selling of 799 financial corporations (799 was the number people on Wall Street were repeating all day). This means investors have to buy these stocks before they can sell them — they are no longer permitted to sell first and buy later. We can hope these rules will help prevent Wall Street from contributing to the list of bank failures.

If anyone thought these government interventions would stop the parade of bank failures, they were disappointed tonight when the FDIC took over Ameribank, a small bank with offices in West Virginia and Ohio. Ameribank probably qualifies as a small business by someone’s definition, with $113 million in assets at the end of June.

The Office of Thrift Supervision (OTS) says Ameribank made too many construction rehabilitation loans. These loans paid to fix up distressed real estate, and many of the projects went bad in the depressed real estate market.

The West Virginia locations are being taken over by Pioneer Community Bank. The Ohio locations are being taken over by Citizens Savings Bank. The FDIC will hold on to the bank’s other assets and figure out what to do with them later.

Wednesday, September 17, 2008

The Arctic ice coverage seems to have leveled off as the sun disappears from the Arctic and the ocean starts to freeze over for the winter. The ice coverage area is more than last year’s shocking record low, but not by much, and the total amount of sea ice on the Arctic Ocean is less than ever.

The most accurate daily measure of Arctic ice we have is the ice extent from the National Snow and Ice Data Center (NSIDC). It’s the right thing to look at to measure ice trends, but it is not a reliable reflection of the total amount of ice on the Arctic Ocean. That’s because the NSIDC measures the ocean area covered at least 15 percent by sea ice. By this measure, the same cluster of ice that covers 10 square kilometers one day could cover 50 square kilometers the next if the waves toss it around — or vice versa, if winds pile up ice against a shoreline.

This effect, dispersion, is just one of the reasons why ice coverage is not a measure of the total amount of ice. Ice is also thicker at some times and thinner at others. The average ice thickness measured this year was less than previously recorded. In addition, thinner ice, being lighter, is more easily dispersed. Based on this, the total mass of Arctic sea ice is probably 15 to 20 percent less than at the minimum level a year ago.

And next year? A lot depends on the weather in the next few weeks. A sharp cold snap early this fall could lead to near-normal winter ice formation this winter, in spite of the low ice extent and warmer water temperatures. If that happens, next summer could look a lot like this summer. If it does not, the Arctic will start next summer with less thick multiyear ice than ever and will surely melt away in a way we have never seen. That is the more likely scenario, and shipping companies are already making plans for freight runs across the Arctic Ocean next August and September.

Monday, September 15, 2008

As the fourth largest city in the United States reels from the worst natural disaster ever to hit it, it seems that the people in Washington have already forgotten that Houston exists. At the Department of Homeland Security, Michael Chertoff’s statements this morning reflect the exact same kind of confusion that characterized the response to Hurricane Katrina. Clearly, the evacuation planning mistakes of Hurricanes Katrina and Rita were not repeated for Hurricane Ike, but the disaster response is sadly lacking. Once again, it is clear that higher-ups in Washington are not returning Homeland Security’s telephone calls, leaving Chertoff to riff optimistically while having no idea himself when the disaster relief effort might get started.

This time, the fat cats in Washington have an excuse. They are distracted by the largest weekend of collapses ever on Wall Street, as two of the largest companies threw in the towel simultaneously — one filing for bankruptcy, and the other acquired by a bank that has troubles of its own and that even before this deal, would be fortunate to survive the next sixteen months. All this happened while two blocks away, the world’s largest insurer seemed to be scrambling to get money together to continue operating. For people who care about money, it’s one of the most gripping tales to come out of Wall Street.

And yet, in spite of the magnitude of the drama on Wall Street, that is a very poor excuse for forgetting about Houston. John McCain this morning made a statement that “the fundamentals of our economy are strong.” That is exactly the wrong thing to say to people temporarily displaced after a giant-sized hurricane has just ripped up one of our great cities. The millions of people unable to go back to work this morning are surely feeling uncertain about whether they will have a job to go back to, and it provides no assurance when the people in Washington suggest that their problems will have to wait. To be fair, McCain did not mean to slight the people of eastern Texas, or the people of southern Louisiana, for that matter. It is just that, as he responded to the worries about the billions of dollars at stake on Wall Street, and the complexities of that situation, he forgot about what the Gulf Coast is going through today.

It is a political error for McCain to slight 7 million Texans whose votes he may shortly be seeking, but the omissions at the White House, leaving the disaster relief effort hanging as they tried to work out deals to save Wall Street, are a more serious matter. If Bush had anything to say this morning about the helicopters needed to rescue people stranded in places like Galveston, I can’t find that statement. But he did specifically say that the focus of his team was elsewhere:

Bush said his advisers at the White House and "throughout my administration" are focused intently on the problems and how to "promote stability in the financial system." He said he was remaining in close touch with Treasury Secretary Henry Paulson and had been throughout the weekend. Paulson was to join White House officials in discussing the situation with reporters at the White House later Monday.

I don’t even have any friends in Houston (that I specifically know about) but I know enough about Houston to know that it is an important city, and that it’s in crisis and needs help right now. Even if money is all you care about, getting people back to work a few days sooner in the Houston area could have a huge impact on the money side of the economy. Wall Street is important, but at a time like this, the top people in Washington could leave it to others to watch over as they address the more pressing problems of the Houston area. Instead, the signal they are sending is that only money matters, and that people will have to take care of themselves. It is the wrong message to send. Especially today, let’s remember Houston and do what we can to get the people there back home and back to work.

Saturday, September 13, 2008

Hurricane Ike just crossed Houston, the heart of the U.S. oil industry, probably flooding large areas in and around the city. Refineries closed to prepare for the storm, and while no one knows the extent of damage at this point, it is safe to predict that not all of them will reopen next week. Other oil facilities were already closed by Hurricane Gustav last week and may have suffered further damage from the current hurricane.

So many refineries are closed now that the U.S. Department of Energy is predicting spot shortages of gasoline across much of the country, from Virginia to New Mexico. Gasoline prices are likely to increase nationwide, though probably not, in most areas, to the levels we saw in June.

Fuel supplies are especially critical in the disaster recovery areas in Louisiana, Texas, and potentially Arkansas (where Hurricane Ike is headed next). In a disaster, everything from evacuations to cleanup depend on fuel, and officials will be trying to make sure there is enough fuel to power the workers who work to reopen roads, restore electric power, put out fires, and so on.

The damage from Hurricane Ike is not likely to boost crude oil prices, at least not right away. With temporarily diminished refinery capacity, the United States will be processing less crude oil in the coming weeks, and this slowdown may pull world oil prices lower.

Friday, September 12, 2008

The financial health of the banking industry was a subject of discussion and intense speculation all week.

It started last weekend with the U.S. Treasury deciding to nationalize Fannie Mae (along with Freddie Mac). This is a move that, if carried through, is likely to cost $1 to $3 trillion before it is all over (I suppose that would make it the most money ever to be spent subsequent to one weekend crisis meeting in Washington), so a lot depends on how Congress, the Treasury Secretary, and the President react when the $200 billion limits are reached. That could happen before the end of the year unless U.S. real estate values increase sharply from their current levels. Fannie is said to be essential to the continued operations of the U.S. banking system as we know it, yet its excesses contributed mightily to the current troubles in the financial sector.

On Monday, Warren Buffett started to back out of the deposit insurance business. Buffett soon confirmed that the Berkshire Hathaway subsidiary Kansas Bankers Surety Co. has started to notify its 1,500 customers that it will no longer issue bank deposit guaranty bonds, a form of deposit insurance for businesses and investors with deposits over the $100,000 FDIC limit. There are still several competing companies in that business, but Buffett’s exit has been widely seen as a vote of no confidence in the banking sector.

All week long there have been conflicting reports about the future of Lehman Brothers, one of the largest brokers on Wall Street. A report that Bank of America would lead a buyout now appears to have been overly optimistic. According to widely reported hearsay, Treasury Secretary Henry Paulson opposes the use of government money to keep Lehman Brothers operating. As of Friday afternoon, the most likely scenarios seemed to be that three or more large foreign banks could get together to buy a majority stake in Lehman, or that Lehman could start shutting down most of its operations. In the latter scenario, the thought is that its investment funds, at least, could continue. This could be a very long weekend, according to John Authers writing in the Financial Times.

The rumors swirling about Washington Mutual (Wamu) are not quite so ominous, but the bank this week insisted that it has sufficient capital to carry on its business and released selected financial measures early to try to reassure investors. Instead, Wamu’s stock ended the week at 2.73, a third lower than a week ago and a fifth of what it was at the beginning of the year.

Thursday, September 11, 2008

The United States spent more than ever on imported crude oil in July. The total tab was $51.4 billion, 13.7 percent more than in June. The result was a near-record trade deficit that month, $62.2 billion, beaten out only by March 2007 and the 13 months from September 2005 to September 2006. But that was a time when exports were a third less than they are now.

Oh, I know, we’re trying to cut back on oil consumption. In truth, we are cutting back, ever so slightly, but the record high oil prices more than wiped out our half-hearted efforts at energy conservation. If oil prices ever go up like that again, we’re sunk.

So much for the theory that the falling U.S. dollar would stabilize the U.S. economy by boosting exports. Exports are going up, to be sure, hitting a whopping $168.1 billion in July, but energy imports (which are more than half of all U.S. imports) are going up just as fast. It is only by cutting back on other imports, such as food and clothing, that we have been keeping the balance of trade close to level.

The falling U.S. dollar drives up the price of everything we import, including crude oil. In principle, a falling U.S. dollar should lead us to import less, and we are importing less. However, this does not help stabilize the situation until the amount of money we spend on imports goes down. And the way things are going now, it is hard to see how that could happen. Instead of approaching a point of equilibrium, the United States is in a death spiral of:

High oil prices, leading to

A trade deficit, leading to

A decline in value of the U.S. dollar, leading to

Higher oil prices

Each of these factors feeds the others, but the key to escaping this vicious circle is cutting back on imports to reduce and eliminate the trade deficit. And since most of our import spending goes to energy, the only way out is to somehow limit ourselves to using the energy we create ourselves. That is, we need energy independence, or at least an approximation of it. I know it sounds preposterous, even impossible, if you look at the way the United States has done business in the last 40 years. But it is not impossible. We have done it before, and we can do it again.

And we need to do it soon. Oil prices are going up on their own, mainly because of the increased cost of finding and extracting oil. It has gotten so bad that the White House is talking about drilling for oil in the deeper water off the East Coast. We are not likely to find much oil there for $100 or $125 a barrel. Most of it will cost more just because of where it is. Oil prices fluctuate with the seasons, so they are falling now, but there is no reason to hope that next summer, prices will stop at $125. Rather, it is likely that oil prices every year will be higher than the year before.

Some people are saying the free market will sort this out. That is not really true. In the long run, we would eventually arrive at a point of equilibrium, but what would that point look like? Just to give you an idea, if we could somehow slash oil imports by 50 percent today, that by itself would not be enough. The United States would still have a trade deficit. The U.S. dollar would still be declining. If we talk about letting market forces take us wherever they want to take us, we are talking about letting oil prices continue to rise at least until Americans voluntarily cut back on oil consumption by more than half.

What would it take to get you to drive your car less than half as much? To heat your home to 52 degrees Fahrenheit instead of 72? To take the bus instead of the airplane for half of your long-distance trips? How bad does it have to get to produce changes in behavior of that magnitude?

No one knows precisely what the answers are in aggregate, but we know oil is a hard habit to break. A good guess at a market equilibrium, if we keep going the way we’re going, looks something like this:

Crude oil prices between $300 and $350 a barrel.

Gasoline prices between $14 and $17 a gallon.

Milk prices around $7 a gallon. Beef as a luxury item. No more pears flown in from Chile.

Between 30 and 50 million Americans sleeping in shelters for the winter because they cannot heat their homes.

More than 80 million Americans working at home because they cannot afford to get to work (or sleeping at work because they cannot afford to go home).

Foreign interests owning more than half of the U.S. banking system, and quite possibly more than half of commercial real estate too.

Almost half of retail space in the country vacant. Most restaurants closed.

I could go on, but you get the idea. Just letting things go is not a solution. The economy as we know it would collapse long before we would reach an equilibrium. The kind of tinkering we have been doing so far is not nearly enough. To make things worse, this crisis is upon us at the same time as a slow-motion collapse of the banking system, a crisis of historic proportions in itself, and the climate crisis, which already calls for the largest re-engineering of the world economy ever imagined. In this moment, we cannot afford to be hesitant or half-hearted about rescuing the real economy. So far, the United States is acting like a dieter who, discovering that he is still gaining one pound per week and is now 180 pounds overweight, resolves to stop putting the candy sprinkles on the ice cream. That is not enough! It is time for drastic action, action on a massive scale, a scale that could include cutting oil consumption by half. Bold, even desperate action. I’m talking about changes like these:

A ban on new oil furnaces for heating (perhaps exempting the Arctic Circle).

A stiff tax on the heaviest gasoline-burning passenger vehicles (those that weigh more than about 800 pounds per passenger, perhaps).

Phasing out the use of oil for paving roads and parking lots.

A ban on the manufacture of gasoline engines (for cars, boats, trucks, lawn mowers, etc.) that cannot also run on E85 (a fuel mixture that includes only 15 percent oil).

Taxes on energy-intensive foods, such as beef, chicken, eggs, and milk.

Increasing the federal gasoline tax by 10 cents a gallon every year until the trade deficit goes away. Extending this tax to fossil heating oil.

Legislation that wipes out all zoning rules that currently prevent people from installing windmills at home.

A massive investment in other sources of energy and in energy efficiencies, such as having federal buildings generate the electricity they use.

At the same time, it is imperative to address the other destination of money that flows out of the United States by the billions every day. That is the U.S. military installations in other countries, especially Iraq. Most of that money stays in those countries. We will surely need to cut that back by more than half as well.

Yes, this is drastic stuff. It hurts. I am not sure these are quite the right answers. On the other hand, everything I have suggested is not nearly enough. Cutting oil use by half, in a country run by oil men, does not come easily. But if we wait until gasoline costs $10 a gallon, we will still need to do all the same things, and more, to solve this problem. It will hurt less if we start now.

Tuesday, September 9, 2008

It’s one of the axioms of economics that you can find an alternative to anything. This is the main reason we expect people to turn away from a product when its price goes up. The alternatives will start to look more attractive by comparison.

It’s no surprise, then, that the sharply higher fuel prices this year have led U.S. drivers to drive less, even though that never happened before. We knew people were staying home more often. That’s a complaint of concert promoters and retailers, who have been seeing fewer customers.

Now an AP story tells us that more people are riding the bus. In an American Public Transportation Association report out today, mass transit ridership is up 5.2 percent. Transit agencies are having to adjust to the increased demand. New York is experimenting with subway cars with no seats so they can carry more passengers. Already in rush hour, most New York subway riders are standing, so it’s not as big an adjustment as it might seem to have everyone stand in some cars.

Friday, September 5, 2008

Tonight’s FDIC takeover target was Silver State Bank of Henderson, Nevada, one of the largest suburbs of Las Vegas. Its 13 locations in Nevada are being taken over by Nevada State Bank. Nevada State Bank is paying a 1.3 percent premium to acquire the deposit accounts. It is also acquiring some cash and securities. The FDIC will liquidate the other assets later.

Silver State Bank merged with Choice Bank of Arizona earlier this year. The four locations in Arizona, with accounts of former Choice Bank customers, are being taken over by National Bank of Arizona.

Silver State Bank recently reported $2 billion in assets. It was hurt, it said, by the poor performance of construction loans in particular.

There is a political connection in the Silver State story. Andrew McCain, the son of presidential candidate John McCain, was a director of the bank and a member of its audit committee until July 26.

Then last month, two of the bank’s founders, one serving as CEO and the other as chairman, resigned just before the latest earnings report was released. The company’s stock, valued at $14 per share at the beginning of the year, fell to $9 in March, then declined rapidly, falling below $1 on August 1 and ending the day today at 56 cents.

The FDIC pattern of taking over just one bank per week strongly suggests that it has only enough personnel to assemble one bank takeover team. It will surely need to create a second team to stay on top of the pace of bank failures going forward, but civil service rules prevent it from filling key bank examiner positions with members of the general public. Instead, these positions can be filled only by U.S. government employees who have years of experience in related civil service jobs.

Wednesday, September 3, 2008

For advice to be useful or constructive, it has to make sense within the point of view of the person receiving it. It does not help to suggest an action a person can’t or wouldn’t want to do.

My sophomore macroeconomics professor gave a real-world example of this. If the president of a company hires you to tell him how to overhaul his company, your recommendations cannot include firing the president. Even if that is what needs to be done, the recommendation you offer has to point toward actions the president might actually consider.

There is a branch of economics that deals with these issues, especially on a national level. In the field of economic development, the question is not whether a country would be better off adding ten universities and a thousand factories, but what it can realistically accomplish next starting from where it is.

On an individual level, there is the old cure for insomnia: “What you need is a good night’s sleep.” That’s a joke, of course, but lots of well-meaning lifestyle advice is given in the same manner. The advice is not helpful because it is based on the assumption that the problem doesn’t exist.

Running, for example, could be a way to lose weight, but this is not a strategy for people who are too heavy to run for more than a few minutes at a time. They need a form of exercise that puts less stress on their already stressed bodies, at least at first.

A friend told me another example. An expert suggested that eating flax seeds would help reduce inflammation, but cautioned that one should eat “only freshly ground flax seeds.” This might be true in some scientific sense, but to expect a person who has an inflammatory lifestyle to muster the energy to get a grinder and learn how to grind flax seeds, and then to do so every morning before going off to work, is missing the point. A person who has a general problem with inflammation — as many people do because of the inflammatory effects of the western diet — doesn’t have the energy to take on such a big initiative. A program of action that is simple enough to do is more important than having it be ideal in a theoretical sense. Better advice about flax seeds would be to buy commercial flaxseed meal and store it in the freezer. This way, you get some of the benefits of flax seeds, and it’s something you can actually do. After a few years of anti-inflammatory initiatives like flaxseed meal, you might find that you have the energy to grind flax seeds every day, but that level of energy has to come first.

Magazine articles with advice on clutter often make the same mistake. One suggestion I read recently: a designated spot to put today’s mail so that you can find it later when you have time to go through it. This might be a good strategy for someone who is already pretty well organized, but it won’t work for the people who really have a problem with clutter. The nature of clutter is that the spaces are filled. They don’t have any spare spaces that can be designated for one purpose or another. Being better organized might be the ultimate outcome, but they have to start out by having less stuff.

The traditional advice for shy people is equally useless. “Get out there and mingle,” “Go to more parties,” “Just be yourself” — the strategies that work so well for people who can’t imagine being shy may not help people who actually have a problem with shyness.

We all know people who are ready to dispense advice at the drop of a hat. They have a solution for everyone. But good advice is harder than it seems. The downfall of most advice that is supposed to solve a problem is that the problem keeps the advice from working. Anyone can argue against a problem. It takes a disciplined imagination to look inside a problem and find the way out.